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Wednesday, November 2, 2011

Retirement at 65? Not At Our Expense!

Recently a lot of local political discussion has been had regarding pensions and retirement. For years a subject in DC has been Social Security and what to do about what is becoming the biggest and most dangerous Ponzi scheme in the history of the world.

Social Security as a Ponzi scheme?

Make no mistake, Social Security really is a Ponzi scheme, I mean it's completely built on the same concept isn't it? A Ponzi scheme for those that aren't up on the details is basically a scheme in which old investors are paid off with the funds new investors put in. So for instance, if I go to Bill and say I need some money for a business, he gives me ten grand. I then use that ten grand to purchase some things that make it look like I'm doing great, and go to John and say "Hey, I need $25,000". He gives me that $25,000. I then pay Bill back say, $15,000 and he's so impressed with the turnaround he tells his friends, who invest and then I pay John back $30,000 who tells his friends who invest and so forth.

Many will tell you Social Security is not a Ponzi scheme at all. The NY Times recently posted an entire debate on the subject, allowing readers to answer with their thoughts. I could go through the argument and give my view of each point, but that's for another day. Today let's just talk about the retirement age, and whether or not it's appropriate where it is, at age 65 over most of the developed world. (In the undeveloped world they don't call you "retired" if you live to age 65, they call you "lucky".)

The Origin of 65 as a Retirement Age, and of Social Security

As this page outlines, the origin of age 65 being the age of retirement dates back to the 1800's, when Otto Von Bismark introduced a social security system to Germany. A little "light at the end of the tunnel" to the common man, never really intended to cost very much as at the time very few Germans-or anyone-survived until the age of 65. You see back then, "developed" countries were very much like "undeveloped" countries are now in that if you reached age 65 they called you "lucky", not one of the many receiving Social Security, but one of the few to live that long, work that hard, and earn what was essentially your pension.

Basically it was the equivalent of setting the age of retirement at 100 today. You see in 1880, life expectancy worldwide was roughly 40 years of age. So in order to earn social security in the days it was created, you had to outlive your co-workers, friends, and relatives by about 25 years-more than half the length of the average life at the time. You could translate this several ways to today's day and age in America, here are a few equivalents to what age 65 meant back then.

Today life expectancy is about 77.5 years. Add 25 years to that, you could receive social security at age 102.5.

25 years is 62.5% of what a typical life lasted in 1880. So, add 62.5% of life onto our current life expectancy and you'd start receiving social security at the ripe old age of 125!

Look, I don't think either of these ages are the appropriate age to start receiving social security or to consider yourself retired. They're clearly way too old, and given that the concept was introduced basically as an unattainable carrot for the average worker, to use it as a base from which to determine what an appropriate age would be now would be...well, inappropriate. However, the age of 65 is clearly killing our country's finances. That fact is undeniable.

Social Security's Current and Projected Costs and Increases in Cost

Social Security accounted for roughly $701 billion in spending in 2010, and projects to account for almost $800 billion in 2011, as outlined here and here. This is more in spending than any other portion of the federal budget other than Medicare/Medicaid. The amount even leaves in the dust the amount spent on defense (roughly $689 billion). With the money spent on Medicare, Medicaid, and Social Security alone you could literally set up two fully functioning governments (at least). It's insane, and as the "baby-boomer" generation begins to collect it's only going to get worse.

Some estimates have the number of "baby-boomers" at about 75 million-or roughly 25% of the current population (based upon 2010 census information). With another 24% of the population under the age of 18, and another 13% over the age of 65 that leaves about 38% (roughly 117 million) of the population holding the bill as baby-boomers begin to retire and collect. They were born at a clip of about 4 million per year, and they'll retire at roughly the same clip (as a point of reference, 2 million retired last year), doubling the current annual totals of retirees and bringing our country to it's knees financially.

At a cost of roughly $13,000 per retiree each year, that means on top of the $701 billion we already spent last year, we'll be adding almost $51 billion annually. The net effect (total added less total subtracted due to deaths) will probably be somewhere in the $25-30 billion a year range (estimating a 2 million annual death rate amongst those 65+). This doesn't adjust for inflation. We simply cannot afford this any longer.

So What Do We Do?

The clear answer is three fold-raise the age of retirement, raise the social security contributions, and cut back on increases in benefits. These things are all easier said than done, but they're necessary. As the Social Security Administration outlines itself, an increase in age of recipient to age 70 would result in a savings of over $67 billion annually by the year 2040 (bear in mind as it's currently structured Social Security WILL go bankrupt in the year 2037). An even more minor increase in age to 67 according to the same report would result in annual savings of more than $23 billion by the year 2022. Carrying that annual savings forward the 15 years to 2037 when Social Security would otherwise go bankrupt would result in a total savings between then and now of roughly $350 billion. Sure that's only half of what we currently spend annually, but combine that with minor increases in contributions and decreases in payouts and you're in business.

What Else Do We Do?

I know just as well as anyone else with half a brain that's ever paid rent, gone shopping, or eaten, that one simply cannot live off of $13,000 per year. However, at some point one has to be charged with looking out for their own interests. Doing something as simple as setting aside $50 per week if you start out as a 22 year old graduate could mean a world of difference when the time comes for retirement. We have to become a country of people capable of and interested in looking out for ourselves, not simply dependent upon the government to fund our lives because medicine as it currently exists allows us to live longer.

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